How to sell your established web site — and how much you can get for it.
One of the more interesting sessions during the recent Epik Developers Conference was about selling developed web sites. David Fairley, who operates a web site brokerage, explained the fundamentals of buying and selling established sites.
A discussion at Elliot Silver’s blog yesterday reminded me that I needed to follow up with Fairley for a story.
Fairley has had a lot of success buying, building, and selling web sites for himself and clients. One of his early successes was Hammocks.com. He had an online hammock web site, but then had the opportunity to buy the Hammocks.com domain for about $11,000. He bought it, enjoyed the SEO benefits of the domain, and sold the site to NetShops in 2002 for just shy of $1 million.
Another big success was Strollers.com, which he sold for six figures.
In his presentation at DevCon, Fairley laid out seven fundamentals that developed web site buyers care about:
1. Cash flow the site produces (net profit or EBITDA)
2. Organic SEO rankings
3. Traffic stats
4. Cash flow and traffic trends (is it growing?)
5. Business model (ecommerce, dropshipping, affiliate, ppc)
6. Domain name (high quality generics add some value)
7. Average sale on your site
Fairley’s clients are mostly sophisticated buyers such as high net worth investors and people from the private equity world. They’re looking for cash flow businesses, and the typical sale is for 2.5-3 times the trailing 12 months EBITDA (earnings before interest, taxes, depreciation & amortization). Multiples can go higher, especially if the site is growing. Fairley said that most of the sites he sells have been around for 3 or 4 years or more.
His brokerage only deals with sites making at least $20k profit over the trailing twelve months. However, he is relaunching his web site with the ability for people to self-list web sites they have for sale. This may give owners of smaller sites a way to reach buyers.
Jeff Edelman says
I attended the Epik Conference and thought that it was very worthwhile. However, the one presentation that I found troubling was the one on valuation because I felt that the numbers used dramatically undervalue web properties. And I promise I mean no disrespect to David Fairley, who has obviously built himself a successful business.
Let’s say a domainer has an excellent category killer generic domain that generates fairly substantial income. Or perhaps a handful of very good ones. Or let’s say a domainer uses Epik’s Development platform to build a very large portfolio of domains.
For arguments sake, I’ll use a number that says the owner in any of these 3 scenarios is getting 30k monthly in profits – a number that I think would be considered reasonable with a category killer domain or a very large portfolio of domains that are each cash flow positive. But use any number you like because we are talking about a formula here. It works whether the site is generating 10k/monthly, 20k/monthly, 30k/monthly or anything else. According to the formula, the sales price on this particular example should be about 1 million dollars.
I believe a domainer would be insane to sell such a site for a million bucks. Even after paying a third in taxes on the 30k monthly, it would leave a monthly net of 20k profit. So keep that number in mind. The owner is currently generating 20k monthly in net profit.
But if the owner sells for a million bucks, let’s put the net after taxes at 800k. (would owe 15% in capital gains to the feds plus most states will charge a state tax on the sale.) The owner then takes the 800k and invests the money in a mix of stocks and bonds. Let’s say it gives a return of 6% annually, which is a reasonable estimate for a mix of stocks and bonds. That is 48k per year, which is 4k per month. And that’s gross, not net.
So the owner can keep the business going and bring in a net of 20k monthly, or sell the business and bring in a net well under 4k per month.
Unless you feel you have a highly depreciating asset, you’d be insane to sell a domain earning 30k monthly in profit for only 1 million bucks.
There’s a reason that the average stock p/e is around 15 historically. You should be able to sell a profitable company for somewhere around that range as opposed to only 2.5 – 3 times yearly profit. And if you have a business that is growing, and we all know that much more commerce will be done in the coming years on the internet than is done right now, you should be able to sell at an even higher p/e. Growth stocks have p/e’s well above average.
So I feel that when a domainer is deciding on whether or not to sell at a certain price, they really have to analyze how much money will be generated off of that sale. It may sound great to sell a domain, or a group of domains or entire company for a million bucks, but if you have a business that is spinning off a nice profit, you’ll be much better off keeping the business going than selling it for 2.5-3x EBITDA.
Andrew Allemann says
@ Jeff – I can think of a number of reasons you might want to sell at that price. One way to look at it differently is if you can take that $800k and invest it in a new startup that you hope to build up like the one you just sold for $1M.
SL says
The presentation at that link isn’t accessible to Mac or Linux users – anyone have a link to it in a non-proprietary format?
Curious if he covers the buyer’s view of traffic mix with regard to cash flow stability.
It would seem like the multiple would vary quite a bit if most sales originated from SEO (notoriously non-stable) vs. a more balanced mix of media buys, affiliate, SEO etc.
Meyer says
I agree with Jeff.
If the domain that the business was built
upon was HomeworkAssistance ,com. Maybe,
take the money and run.
If the domain is a category killer type
domain like Homework ,com, I would require
a much higher multiple.
(hypothetical domains)
In many of the cases, the website is not
max’d out to its potential because the
entrepeneur doesn’t have the financial or
technical resources required to take it
to the next level.
An investor should be able to improve the
operation. Maybe combine managerial and
technical operations with another similar
website they own to maximize synergies.
Einstein says
Jeff, you forgot one thing: You bring in $4k a month by doing nothing AND have $1 Million, no matter what Google or Bing do. Totally stress free
Jeff Edelman says
@Einstein I didn’t forget that. When punching the numbers, you need to assess your risk, which is different in every situation. If you are completely dependent on a more or less static landing page that only gets parking revenue, your risk is higher. But if you own a domain such as womensclothing.com, you should be able to grow your business over time rather than run the risk of it evaporating because more womens clothing will be purchased online over the coming years than is bought now. And you should be able to use multiple revenue sources to take advantage of the opportunity. We’ve all seen what has happened to parking revenue, so if you are totally dependent on that, you may very well want to take the money and run. But for somebody with a better asset whom can take advantage of the overall growth in the internet, you should be able to increase your site’s value over time.
Poor Uncle says
3 x net profit seems a bit low. However, since he is in the business of selling web sites….this must be the reality at this time. That would explain why experience domainers are focusing on selling domain names vs. selling web sites.
@Andrew – Another way to get your hands on the 800K is by borrowing it against your cashflow.
Based on latest interview with Frank Schilling…he seems to imply a multiple of 8 would be a great payday.
Clinton says
I know and respect David, but must disagree with some of what he says. Cash flow is of prime importance, yes. SEO isn’t. Smart buyers realise that traffic from search engines is high risk traffic and can’t be compared with traffic from subscribers, a large affiliate program with thousands of affiliates etc. I advise buyers to apply a valuation discount to the extent the site is reliant on any one single source of traffic, even if that source is Google. Huge businesses have gone bust because their site inexplicably disappeared from the SERPS.
Jeff, I’m considered an authority on website valuation, have written extensively on the subject, have studied the market for years – everywhere from David’s site to more active marketplaces like Sitepoint – and I’ve learnt a few things. 15x type PEs are for very established, stable companies listed on stock exchanges and offering fractinoal ownership and liquidity for shares. Websites of the type David and I see everyday, OTOH, are relatively high risk, non-liquid assets. 3x is an over-valuation for most of them. Site owners/sellers may not agree, but if they ever want to sell or need to sell they’ll have to face the truth. It costs nothing to test the market by listing at David’s site and only $19 to test at Flippa (you don’t need to actually sell). In competitive bidding if no buyer offers you more than 2x then, whatever your personal opinion of your site, the market doesn’t agree with your valuation.
David seems to have omitted other assets that buyers consider valuable. I’ve no doubt he is fully aware of them, but he may have been trying to keep the list concise. Buyers also like large, clean, double opt-in subscriber lists, lucrative partnerships with other sites, loyal communities, quality content, other intellectual property such as large image and video databases and sites that have minimum management requirements. If they are under-monetised or under-SEOed that’s a bonus.
We discuss issues like valuation and venues for selling, including discussions about David’s site, at the forum in my signature.
Einstein says
Jeff,
if you sold a site or two and kinda set, than you may be willing to take many chances.
I have a super cat killer domain /site and will sell for $1 million…and I’ve made about that in the past 7-8 years. Why? because I’m done with my large expenses and can actually save almost all that money. It’s still no sure thing when it comes to retirement, but as close as you can get to it. With that money you can do a lot of new things and think clearly, with no pressure. Or move to small town AL or PA and enjoy life but at lot less money than San Francisco or NYC.
Rob Monster says
For awareness, Slideshow.com uses Silverlight to render the presentations.
If you don’t have Silverlight, just click the icon to install it.
Also, all of the DevCon Powerpoints are uploaded at Slideshow.com. Search for “Epik”.
Enjoy.
Also, feedback welcome on Slideshow.com — another Epik production. 🙂
SL says
Thanks for the response Rob. Unfortunately Silverlight only works on Windows.
Rob Monster says
@SL – not true. Silverlight runs great on Mac. I am on a Mac.
Go here:
http://www.microsoft.com/getsilverlight/Get-Started/Install/Default.aspx
Matt says
Very interesting post — nice have some transparency on the ‘typical’ industry numbers being used to evaluate developed websites.
If you do follow up with Mr. Fairley, I would be curious to know how the site owner’s role is factored in. In a lot of valuation models for small businesses (esp. sole proprietorships), EBITDA is discounted because it’s generally assumed the owner/top management has significant responsibility for the success of the company. When the top ‘rain-maker’ / decision-maker exits, top-line revenue usually suffers.
A lot of sites, especially blogs, depend on thoughtful insight, unique perspective & quality writing delivered by their operator-owners. Plus they rely on the writer’s diligence in coming up with new material on a consistent basis. Without that tender care & attention, search rankings, repeat visits, RSS subscribers and new visitor traffic could go downhill. (Would DNW be the same if Andrew wasn’t writing it?)
If Mr. Fairley’s buy-side clients are wealthy individuals and/or PE firms, seemingly they’re looking for passive cash flow– and not the commitment of sourcing & publishing quality content. So, what kind of figures are used to discount EBITDA to reconcile the role of a site’s primary writing talent? Or do these buyers entice site owners to stay onboard (as freelancers/consultants, or with a vesting schedule)?
SL says
Well, your luck must be better than mine 😉 It crashed Firefox on my Macbook.
Not a big deal. This weekend I’ll either compile Mono or dig up a Windows VM that’s on a disk somewhere around here.
Clinton says
I installed Silverlight to see the presentation as it was from someone whose knowledge and experience I respect.
It wasn’t worth the effort. There’s hardly anything there outside of what’s in the above blog post (and a pitch for his company).
David Fairley says
Thought I would stop by and read Andrew’s article and comments, and I am impressed by the insightful comments this has instigated.
I would like to address the comments from Jeff and others relating to valuations below.
But first, I want to establish that while I do have expertise and years of practical experience buying, selling and brokering website businesses and premium domain names, I am by no means admitting to be a stellar public speaker! I appreciated the opportunity to connect with the folks at the Epik Conference, which Rob Monster orchestrated beautifully, and sharing some of my experiences and insights from my business perspective within a limited time frame. I did receive a lot of solid positive feedback that my discourse provided helpful perspective. So, despite disappointing Clinton, who slipped in his own plug above, I think there are many people who would benefit from understanding the basics I had time to outline.
Beyond the fundamentals I listed in the speech – such as cash flow, traffic, SEO etc there are many other elements to consider for sure. I have said the average website business with decent fundamentals and some history tends to fetch around a 2.5-3 X multiple of EBITDA. Sites that come with premium generic domain names with similar fundamentals can achieve multiples of 4 even 5X especially if they have strong sales/profit growth, good margins, clean business model, huge $ industry niche, large customer and email databases, proprietary technology and systems, strong barriers of entry, proprietary products and vendor relationships, multiple sales channels and partnerships(retail, wholesale, amazon, bizrate, shop.com)tons of affiliates etc. Clearly too much information for a 10 minute power point presentation!
The other thing to understand is that it isn’t me or my company or colleagues randomly estimating the values of the online businesses – the marketplace does a very efficient job of determining this by shear volumes of transactions and comps that are easy to understand and see. Buyers want to invest their money in a business which offers them a fair ROI as well as lots of upside potential.
As an example,a buyer with access to $1M to invest will likely end up buying a business that is already netting $250K-$350K depending on the deal, rather than buy a business that is throwing off $150K but has a better domain name or “lots of potential”!
There is less appetite for risk in the market today than prior to 2008 and previously prior to the other dotcom tech bust in 2000. In addition, there is far less capital flying around like in these other years where huge prices were being paid for domains and established internet businesses as well. Times have changed significantly.
In fact, many of the top Internet 500 company CEO’s, whom are clients and or subscribers, have turned down opportunities, we have pitched discreetly, to snap up premium generic product domain names in the last 2 years because they would rather spend $8 at Godaddy and buy a domain name with a suffix or prefix like “all” or “simply” or “store” etc and throw it on their platform and within their network and ramp it up quickly without the huge outlay of capital. That is a major change of viewpoint from previous years for sure.
That is not to say that there are not undeveloped domain names being sold for high prices now or into the future. The point I was attempting to make in my presentation, and the idea behind Epik’s program is develop your domains, add value, make more money while you hold and ultimately attract more buyers to the table at the time of selling – because it will be far more compelling if it ranks well in the SE, has historical cash flows & proof of earning potential, quality unique content, loyal customers, opt-in subscribers, etc. And more buyers mean more bidding and typically higher selling prices achieved.
I have several domain clients who have sat on premium generic product domain names for over 15 years! Imagine if they had of developed these names into websites that generated serious revenues during this period – they could have earned potentially millions along the way, and would have a far greater probability of making a dramatic exit when it came time to sell. So, it is never too late to get in the game and add value – and benefit from this. Just like Jeff says above – maybe you never want to sell if it consistantly and easily earns you $30K/month?
Personally though, I agree with Andrew – I like to build value and sell for 3X+ and reinvest a portion into another venture or two and do it all again every 12 months and take the 15% capital gains tax – there are infinite opportunities and deals to engage, many coming across my desk every day.
Einstein and anyone else reading this thread that has an established business, or premium domain name who wants to discuss the current market value feel free to contact me at websiteproperties.com
Jeff Edelman says
David, you did an absolutely fine job speaking at The Epik Conference and I enjoyed your presentation. I hope that my comments didn’t suggest that I thought otherwise.
Also want to agree with you that there are a lot of very insightful comments in this discussion. This is a great blog post and discussion and I am also enjoying reading the responses on a similar thread that Elliot Silver recently made in his blog. Both discussions are really worth reading. So kudos to Andrew here and Elliot over there for talking about this issue.
David Fairley says
Jeff,
no worries. I appreciated your honest perspective. There are many considerations and approaches to personally valuing a business and domain names. I wanted to offer my experience and insights from my marketplace only for consideration.
I will check out Elliot Silver’s blog – if you have that post available please provide the link.
Jeff Edelman says
The similar discussion on Elliot’s Blog is here: http://www.elliotsblog.com/at-what-revenue-multiple-do-you-sell-a-website-9477 I hope that Andrew doesn’t mind me putting a link to another person’s blog. Andrew and Elliot both write great blogs and this is an important issue and discussion.
Clinton says
Hi David, nice to see you, it’s been a long time 🙂
The fact that you put a plug in wasn’t a complaint, it was an observation to put in context that there wasn’t much more to the presentation that justified reinstalling an operating system to get Silverlight just to view it.
We have usually been in agreement on things like valuation, but I have a question. You did mention about the marketplace deciding the value through the “sheer volume of transactions and comps”. At your end of the market surely there aren’t that many *publicly* available comps and sellers are reliant on the broker giving them an idea of what similar sites are selling for. Is there some place I need to look that I don’t know about yet?
David Fairley says
Clinton, no worries – just wanted to clarify from my viewpoint.
As for available comps, most sellers, and more adamently, buyers, don’t want us to publish the actual terms of the deal.
Essentially, sellers can get a pretty good idea by speaking with references provided by the brokerage and get this information.
Because the supply of really good quality websites on the open market is less than the amount of qualified buyers currently, most of the deals we are getting signed are at or near asking price in the 3x-4x range with a few falling on either side.
Common feedback from buyers we hear is they have looked at a lot of other opportunities elsewhere that ultimately don’t have the detail, records or organization to satisfy prospect’s comfort levels nor pass indepth due diligence to warrant higher multiples or even offers. This is largely the case with sellers representing themselves.
Clinton says
David, thanks for your reply.
I understand and support maintaining the confidentiality. However, that doesn’t sit with your claim that “the marketplace does a very efficient job of determining (prices/multiples) by shear volumes of transactions AND COMPS that are easy to understand and see”.
I can’t see the comps.
Sellers and buyers can’t either.
Are you now saying that the only way for the seller to get comparable figures is by speaking with one or two references selected for him by the broker?
I doubt that gives either buyers or sellers a good enough idea of marketplace prices.
I agree with you that a lot of sellers at the low end of the market don’t have the right info and make DD very dificult. That’s been a particular pain for people like me who’ve done DD on hundreds of sites over the last few years sites ranging in price from a few thousand dollars to a few million. But at the higher end of the market – the $100K+ sites that typically go to brokers – sellers can be a lot more professional when doing the job themselves and put all the information together very neatly. I’ve had many of those and, in fact, some of them were better than many of the broker led sales.
I aim to put together a guide for sellers one day explaining what information to provide and how best to present it (it would be given away for free on my site just like all my other info). I would be delighted if an experienced broker like yourself reading this thread steps forward to co-author it. I believe providing this kind of information would actually benefit the broker providing it and get him more business rather than less.
David Fairley says
I was merely suggesting that sellers and buyers can infer from the listings what multiples are acceptable and what is selling. Most listings fall in the 3-4x range and the varience from list to ultimate price they get sold for will be somewhere close- it is going to be negotiated to some degree – depending on the opportunity and number of buyers that are interested and how many offers come.
There are some sellers in the higher end that are capable of compiling proper detail. However, most sellers don’t grasp everything that is expected and requested by buyers. We provide our clients with a detailed questionaire that addresses 95+% of the answers that buyers typically ask and the this is used to create a professional prospectus that will be provided to qualified buyers. In fact, we are on version 6 or 7 now as we constantly update it with new data that is requested by buyers.
Sellers can receive our documents to assist in the appraisal and in the prospectus creation prior to committing and signing our brokers agreement. Once they see the thoroughness they either feel comforted or anxiety depending on how well organized and well run their online businesses are. This asists us as well in determining if a seller is a good fit for us as well. If they can’t produce the detail and data for their listings accurately and orderly, we probably will pass on the listing because it usually indicates a troublesome property that may not get past the rigor of a typical due diligence process.
Con says
I’ve given this subject a lot of thought over the years and now only ask myself these two questions when buying or selling a site:
1. Is the revenue likely to increase?
2. Could the money be invested to produce higher returns elsewhere?